This Week in Corporate Finance (06/01/12)

This was an extraordinary week, as the market pretty much gave up the ghost as far as the European crisis and the world’s economy is concerned. Fear trumped hope as markets across the spectrum capitulated. Be it equities, commodities or anything other than the safest of the “safe” sovereigns, it was definitely a “risk-off” week.

We are facing an ongoing and perhaps accelerating European crisis, a slowdown in the economies of the BRICs, and a United States where the latest economic reports indicate only a slowing growing economy (+1.9% in the first quarter) and a jobs markets, while positive (+69k jobs) with an 8.2% unemployment rate in May is nowhere near the +350k jobs a month needed to really move the needle towards full employment.

Before we dive into the numbers, keep in mind that we have now moved into “uncharted waters” as the Fed’s Treasury data only goes back to the end of the Truman/beginning of the Eisenhower administration, circa 1953.

For the week, the 2-year US Treasury note yield was down 4bps to 25bps; the 5-year note was down 14bps to 62bps (its new all-time low is now 60bps); the 7-year note touched an all-time low yield of 92bps; the 10-year note was down 28bps to 1.46% (its new all-time low is now 1.4387%); and the 30-year bond was down 32bps to 2.52% (its new all-time low is now 2.5089%, beating the previous record low yield of 2.5090% reached on December 18, 2008).

US mortgage rates also touched record lows and that was before the release of the disappointing jobs report. The average rate for a 30-year fixed-rate mortgage fell to 3.75% and the 15-year fixed-rate dropped through three percent to 2.97%.

In Europe, Spanish bonds sold-off as the 10-year note reached a peak yield of 6.70% (perilously close to the hazardous 7% level and not far from its recent 12-month high of 6.729%) before rallying a bit to finish down only +22bps at 6.53%; in Italy, the 10-year note crossed into 6% territory before settling at 5.74%, off only +7bps for the week, and in France, the 10-year Oat’s yield plunged towards the 1% handle, falling as low as 2.07% (a record low yield) before giving up a bit of its gains to finish the week at 2.26%, still lower by -26bps this week.

Germany continues to be the safe harbor in Europe. The German 30-year Bund fell -30bps this week to 1.67% (after touching an all-time low yield of 1.63%), the 10-year Bund dropped by -20bps to settle at 1.17% (after reaching an all-time low yield of 1.127%, and just when you thought the yield on the 2-year Bund couldn’t get any lower, it actually set a new record low yield of -1.2bps (yes negative, as in, if you give me a dollar today , I’ll give you 99 cents back in two years) before closing the week at +1bp.

In Portugal the yield on the 10-year note improved this week to finish back under twelve percent at 11.97%, a drop of -27bps. The Greek 10-year did sell-off a bit to end the week at 30.54%, but that was actually off it week’s high of 30.97%.

Not surprisingly, the equities markets were weaker this week as return of capital was more important than return on capital. Here in the US, all the major indexes were lower by about three percent; the Dow was off by -336.26 to 12,118.57 (-2.7%), the NASDAQ was weaker by -90.05 to 2,747.48 (-3.2%) and the S&P 500 was softer by -39.78 to fall through the 1,300 level to 1,278.04 (-3.0%). Facebook continues to grind lower and lower, this week touching a new low price of $26.83 or -29% since its IPO.

It was a similar story outside the US, as the FTSE was lower by -91.34 to 5260.19 (-1.7%); the CAC faded by -97.47 to fall through the 3K level to close at 2,950.47 (-3.2%), and DAX dropped -289.65 to 6,050.29 (-4.6%); and the Nikkei fell by -171.06 to 8,440.25 (-2.0%).

Oil prices dropped for a fifth consecutive week, falling by -$8.27 to $83.21/b (-9.0%), not far from it low of the week of $82.56/b and also not far from its 52-week low of $77.05 reached back on October 4^th. 

The Euro touched a twenty-two month low versus the US dollar at $1.2316. While it’s off quite a bit from its recent high of $1.488 back in April 2011 and certainly from its all-time high of $1.602 back in April 2008 (ouch - I remember, I was in Paris at the time), it is still north of its introductory level of $1.19 and its all-time low of $0.88.

Events in Brazil and India, as well as China continue to point to a slowing world economy. Brazil lowered it Selic rate by 50bps from 9.00% to a record low yield of 8.50% and India reported its slowest economic growth rate in nine years.

On the debt issuance front, Eastman Chemical came to market with a $2.4 billion three-tranche transaction. The deal was comprised of $1 billion of a 5-year note, $900 million of a 10-year note and $500 million of a 30-year bond.

With all of the developments of the past week, it will be interesting to watch and see how and if the Fed reacts at their upcoming two-day FOMC meeting on June 19 – 20^th.